Okay. Good afternoon, everyone. Welcome to this session of the Leerink Global Healthcare Conference. I'm Mike Cherny, the Healthcare Technology and Distribution analyst. It's my pleasure to have with us the Cencora team, Jim Cleary, CFO, Bennett Murphy, who does IR, treasury, strategic projects, and I've probably left off some stuff there, but really appreciate the team being here. We're gonna jump right into fireside, but I mean, maybe Jim, just anything you wanna highlight from the last quarter that really stood out relative to just the underlying growth of what's been an extremely strong trend of the business?
Yeah, Michael, thanks a lot for asking, and also thanks a lot for having us here to your conference. We had a very good quarter in our U.S. segment. In the most recent quarter, we had 21% growth in the U.S. segment, so obviously we were very pleased with that. I would also have to say kind of a big call-out from the most recent quarter is we announced that we were going to be buying the portion of OneOncology that we didn't previously own. When we announced our first quarter results, we announced that we had closed on that acquisition.
We feel really good about our MSO strategy now that we own both Retina Consultants of America and OneOncology and, you know, feel that that will be very good for our business, as we're really extending. It's really the natural evolution of a very successful part of our business, our specialty business, and going from distribution to GPO and now into MSO. We were very pleased with the quarter, both from a financial performance in the U.S. standpoint, and from the standpoint of the really strategic move that we made. As a result of the OneOncology acquisition, we also increased our guidance for the year and we increased our guidance on a consolidated basis by 3.5% at the low end and the high end of the range.
We're now at 11.5%-13.5%, and by five percentage points in the U.S., so we're now at 14%-16% operating income growth for the year as our guidance. Thank you for asking that opener, Michael.
You know, it's great, and you touched on a couple key themes, but a lot of it re-wraps around specialty. Specialty as a distribution offering, specialty as a services offering, specialty now with the MSO capabilities. Obviously it's clear to see the market as a whole for specialty is healthy, but how do you view the push and pull in what you're able to out execute on to drive the excess growth relative to the totality of your specialty services, specialty assets?
Yeah. We’ve been calling out for quite some time that really a driver of the growth of our business has been the strength of our sales and specialty to both health systems and physician practices and, you know, both of those customer groups are really driving our specialty growth. As we’ve talked about, one of our strategic drivers is prioritizing growth-oriented investments. We have been and will continue to be investing in specialty in that it is, you know, of course, a growth part of the market and one where we’ve been executing very well and have a long track record in. As I said before, you know, getting into MSOs is just the natural extension of that very successful part of our business.
I wanna get back specifically to some OneOncology questions, but specifically around specialty. You've been a longtime leader in specialty distribution oncology drugs in particular. What is it that you're seeing right now in terms of underlying trends in the oncology market that both positions you to be successful, but then also sets you up to both first invest in and then consolidate OneOncology?
Yeah, I think, you know, Jim said it well that we've had really good long-term trends there and have really good long-term outlook. You know, as you noted in one of your notes that January was soft, particularly in that specialty side and.
Mm-hmm
The number of sales cycles attributed that to weather. As you think about the underlying market, there's really strong key organic growth drivers from an aging population in the United States. You know, multi-therapy treatments, new innovations coming to market, biosimilars coming to market, all those things underpin, you know, the strong fundamentals of the business, strong outlook. You know, as we look in oncology, certainly that's the largest part of the physician administered part of the market. You know, with our acceleration of the OneOncology MSO, that gives us even closer proximity to a really important piece of the puzzle.
Maybe we'll just transition there. Obviously, I don't think anyone was shocked to see the OneOncology consolidation happen. You've talked nothing but positively about the initial investment since you made it a couple years ago. When you think about now owning the vast majority of OneOncology, I know there's still a small stub piece, but what are you able to do to help drive better value of that business now that you weren't able to do without the control position before?
Yeah. Thank you very much for asking the question. There's a few things there that I'd call out, but I think one of the key things is that, you know, now of course we own both Retina Consultants of America and OneOncology, so we're able to help them drive synergies between those businesses. When we only owned 35% of OneOncology, that didn't make as much sense for us because driving the synergies earlier just would've cost us to pay more for the business. Now that we own both, there are just very good opportunities there and we feel that the management teams are just so strong and will be able to execute on these opportunities.
One of them is RCA has been a leader in clinical trial sites and is involved in so many of the clinical trials in the retina market and that's an expertise that OneOncology also has. By you know taking those skills from RCA and really enabling execution across our both of our MSO businesses is a really nice synergy opportunity. There's also back office synergy opportunities in things like revenue cycle management IT where we can really be helpful and other things like staffing. There's a lot of back office synergy opportunities too. Of course long term one of the big plays is Data & Analytics.
By helping execute on those synergy opportunities, I think we're able to bring a lot of value, not only to our company, but to the physicians very importantly, and extremely importantly to the patients. We're very excited on those opportunities. One good thing about Cencora as an owner is, you know, we have very much of a long-term perspective, so we're making these investments for the long term. Thank you for the question.
Along those lines, maybe if we can just take one step further, you talked about the clinical trial capabilities on site selection. Why is that so important? How much of the data interplay that you mentioned can further enhance the value to be a participant within the clinical trial market?
Yeah, thank you for asking that. There's a couple things that I would call out. One is that the physicians are, you know, very actively involved in the clinical trials, it enables them to be even more successful as those products are launched. It really gives the physicians the knowledge base to be very successful once a product is launched. Of course, it's the physicians that are making those decisions. Then I would say a second thing is that having the clinical trial sites really enhances the ability to attract young doctors coming out of fellowship programs because they just so much appreciate the opportunity not only to practice medicine, but to participate in the clinical trials also.
As I've gone to RCA meetings, I've asked young doctors the reasons why they've joined, and they all call out as you know, the clinical trial site leadership is one of those key reasons. It's a great opportunity for the physicians and ultimately for the patients.
I'm gonna jump back to OneOncology, but maybe just sticking with RCA for a second because you have had full control ownership for longer. For everything we can see from the outside, whether it's implied within the business or your commentary, it seems like that business is performing well above your initial expectations. How would you think about what Cencora as a company has been able to do to make RCA a better business?
Yeah, I would just say that, I think really kind of the key thing is that we are investing for the long term. It's, you know, I think if we compare ourselves to an owner that would be, you know, a financial owner owning for the short term, you know, they can be great and do a lot of things, but we're really investing with a long-term perspective. Things like IT systems that can really kind of help the companies be successful over the long term is, you know, I think a value that we add.
One of the other values that we add is, you know, with our focus on specialty, with our focus on being pharmaceutical-centric, we have the two different platforms, and as I said before, we're able to, you know, help them drive synergies between the two different platforms.
One of the other things, I appreciate you talking about the synergy dynamic and not wanting to get too far ahead of yourself given the financial components, but unfortunately for your sake, for financially, OneOncology was acquisitive in between the period of investment and consolidation. United Urology Group was a big deal. Should we view OneOncology going forward now as a further platform for further consolidation, either big or tuck in small organic growth? Like, how should we think about where OneOncology expands from here relative to its base?
Sure. What I'm gonna say would be true for both OneOncology and Retina Consultants of America is, you know, both of them are leading platforms, and there wouldn't be anything of that size. With regard to both OneOncology and RCA, I would expect to see bolt-on acquisitions over time that are, of course, highly consistent with our two strategies of strengthening our position in specialty and also continuing to be pharmaceutical-centric. I would expect to see bolt-ons to those two platforms over time. Yeah, I wouldn't expect us to see ownership in other oncologies unless they became pharmaceutical-centric over time, but it's those two that are really the pharmaceutical-centric ones, yeah.
The logic definitely makes sense there. Yeah. Maybe turning back to some of the core distribution services. Your contracting team did a ton of work late into the year, into year-end, as we prepared for the first round of IRA negotiated drugs. You've come out and said you feel good about where the contracting came. Maybe can you give us a little bit of the experience of why and how you were so effective, and your peers have said something similar, about ensuring that your contracting efforts led to the appropriate returns, appropriate unit economics for the value that you provide for the channel?
Yeah. Thanks for asking. We had, of course, good foresight to know what the products were going to be, and we have a very strong strategic global sourcing team, and our goal is to maintain our gross profit dollars, and we were successful in achieving our goal. I think probably the most important thing to call out is we're very confident of our value proposition, everything that we're able to do in the supply chain, from logistics to compliance and secure supply chain, to managing the inventory and financing the working capital. As a result of that, we were able to really do a good job in maintaining our gross profit dollars.
I know if you've seen one contract, you've seen one contract as a running joke across the entire supply chain.
Mm-hmm.
You know, as you thought about the negotiations, especially as you prepare for the next round of drugs, 'cause this isn't a one-year thing. How do you think about, or what have you been informed by in terms of the first round to make sure that you keep that effectiveness, keep that managing to a dollar profit level in place?
Yes. I do like that analogy because it is accurate, and I do think each relationship is different. We did really well, better than we thought in some places. We did, you know, in line or a little bit behind on some other ones. I think as we look at our value proposition is quite defendable, as Jim said. As we look at the relationships with pharma, it's very clear, right? We have very clear and transparent relationships with pharma, and there's very clear and transparent economics that we derive from the buy side.
That is all, you know, predicated on the value that we drive for them and satisfying the ability to reach tens of thousands of end providers with varying degrees of credit quality and also, you know, very significant efficiency and security.
Bennett, those are great points. One thing I'll add that I didn't mention before is that we do have terms in our contracts that we've been working on for years to have this term that if there is a significant change in price, then we and the manufacturers will come to the table to start to renegotiate.
Got it. I guess, I mean, a lot of the drugs we've seen so far are more traditional small molecule drugs that fall into the Part D side. 2028, you'll start to see some potential changes on the Part B side. How are you thinking about the push and pull related to any differences in the Part B side? Bennett, I'll put you on the spot here today.
Mm-hmm.
I'm gonna paraphrase you. You've said specifically that you've seen so many instances of any major changes, a focus on making sure providers aren't-
Yeah
unduly harmed. How does that factor into the work you're doing with your pharma partners, suppliers, given broader regulatory changes?
Yeah. I think it's important, you know, when bifurcating between B and D to take a second and reflect that the gross to net spread that exists in the D side right now, that gross to net spread does not really exist in the Part B side. There isn't this delta between. There's a massive delta that exists on that side. As you think about, I think that has to inform your logic and how you look at what may or might or may not occur on that as you get to 2028. I think certainly the big, you know, the big drugs are and will be a year beyond that.
Yeah.
You'll have some biosimilar competition to come into place before that, and I think you'll have very clear, you know, as Jim said, with the manufacturers, we have very strong value proposition. If, as you look at some of the things that have occurred in the last few months, I would look at the GLOBE Demo project and focus on how that is structured to get the relative pricing to achieve the relative pricing dynamic that the government wants without an unintended consequence to community-based providers. I think that is helpful and a proof point in that discussion.
This may have been a more relevant question 28-30 hours ago, but I'm still gonna ask it.
Mm-hmm.
Obviously, there's a lot of geopolitical strife going on. Oil, other commodities have spiked meaningfully. Your business is different than some of your peers or at least areas of your business because you don't have the other businesses that have more direct logistics, but you are a logistics company at heart. Can you remind us how you work through some of the, at times, volatility spikes that you see up and down on various different commodities?
Yeah, sure. With regard to oil in particular, I mean, it has an impact on our business, but I'm gonna say it's, you know, in terms of the scope of all of our operating expenses and everything we do, it's relatively minor. You know, we do have terms and contracts where we can make adjustments for things like that in contracts, but I would say overall, we would more lean to being very customer-centric and focused on our customers. You know, those sorts of things have impacts, but given just the diversity of our business and the diversity of our expenses, any one change is relatively minor.
Kinda maybe wrapping for now at least the core pharma distribution business, there's been a lot of puts and takes. We talked about some of the properly negotiated drugs. I feel like generics, I don't wanna say are on autopilot, but it doesn't feel like there's been a lot of variability recently. Like, what are you seeing across the generics market? I keep hearing the word stable, but why do you think that's the case, and how do you think about how the generics market evolves? I think there's a decent step up in brand generic conversions the next couple of years.
Yeah. The answer to your question is gonna be similar to the way you asked it, actually. There's really nothing new to call out. We've been talking about moderation of generic deflation for some time, and really, it's really the same as what we've been talking about for some time. I think deflation has moderated as manufacturers have been prioritizing their portfolios. There's been an increase in inspections and those sorts of things. It's really consistent with what we've seen for some time. Of course, as we look out over the next several years, there's gonna be, you know, very good opportunity in generics that you mentioned. There's also gonna be, you know, great opportunities in biosimilars.
What we see in generics and biosimilars will create room for branded innovation. That's just one, just very good thing about our business and our business model is that we will continue to benefit from generics, biosimilars, and innovation.
Healthy trends, I like to hear that. I mean, one other question on this front, another discussion that doesn't come up a ton anymore is on the generic sourcing side. It's now been, I think, 12 years since you created a very sizable buying group. Like, what do the new activities look like or are there new activities or is it just simply you have a mature business that has massive scale and you just leverage it as best as you can?
Yeah, I think, I mean, you just stated it correctly. It helps us maintain our, you know, competitive purchasing as you'd expect.
I'm trying not to lead the witness here, but, sorry.
I would appreciate if you keep doing it, especially if you say the things I want to say.
I'm gonna start now with like a small, shorter question, open-ended. Let's turn to some of the strategic review assets, in particular MWI.
Great.
Why is Covetrus the right home for MWI?
Yeah. First, let me take a step back and say in November, when we announced our fourth quarter fiscal year results and the guidance for the first quarter, we indicated we were setting up a group of businesses in Other. We have our U.S. segment, our international segment, and then we set up Other. The businesses in Other are very good businesses, but they don't bring competitive advantage to the balance of the enterprise, and they could be even more successful if they were with partners kind of focused on the business where they're particularly strong. MWI is a great business and by far the largest business in Other.
We looked at strategic alternatives, and we entered into a transaction with Covetrus, and it really, I think will be good for the overall animal health ecosystem because MWI has very good presence in supply chain, it has very good customer relationships in both the companion animal and production animal market. It has production animal technologies, and Covetrus has very good companion animal technologies. I think when you put those businesses together, it'll be able to drive a lot of efficiency and drive affordability in the animal health marketplace, which is important.
You pursued a unique structure of the transaction. I mean, I'm sure you evaluate a lot of different things. You have a cash position, but then also some ongoing equity in the business. As you think about the strategic nature of the structure, like what made it appealing to you to make sure that you keep an ownership position in the business going forward?
Yeah. The deal structure that we have in place is the selling price is $3.5 billion, and it's really a merger because we'll get $1.25 billion in cash, $800 million of preferred stock, and then have 34% of the common stock of the remaining business, and we have two private equity firms as our partners that will own the rest of the business who were previously owners of Covetrus and have a great understanding of the business and the market. We felt that this was really the best alternative for the business to create a company that's gonna be very strong in the animal health ecosystem that will really be able to benefit the upstream and downstream customers.
We feel like it's a very good financial opportunity for us, as a result of the cash and the preferred stock and the common equity that we'll be able to make a profit on over a period of time.
This is a very quick turnaround from announced creation of this other segment to the MWI transaction. I can't say I'm shocked given I agree with you on the quality of the business. How are you thinking about the pacing of any potential evaluations of the other assets that currently sit within other, and how do you balance that against fluctuations in performance that some of which are macro-driven versus performance-driven?
Sure. There are three other businesses that are smaller in other, and they're very good businesses. One of them, for instance, we are now accounting for as an asset held for sale, and I would expect that we would make progress on those over time because, again, they're very good businesses. You know, obviously, they're gonna be slower than what we did in the animal health business. It's something that we are focused on and will, I believe, make good progress on.
Okay. For some of the remaining assets that don't sit within other, I know mostly sit within international on the pharma services side, you know, whether it's World Courier or some of the other businesses, what have been some of the puts and takes on demand curves on those businesses, given some of the strategic reprioritization we've seen by pharma companies on businesses that have impacted pharma services capabilities?
Yeah. I'll make a couple comments there.
Mm-hmm.
Our global specialty logistics business, which is the World Courier business, has been a great business for us for over a decade. As we talked about last year, it had a tougher year last year as there were some softness in its market. As a management team, I think they've executed very well, and we talked about on our first fiscal quarter that we've really seen volume growth and start to see profitability growth. We're, you know, pleased with the execution there on the World Courier business. You know, kind of some other businesses in international, the manufacturer services business, probably our area of strength would be in 3PL in Europe, where a lot of the specialty products go 3PL. That's a key business for us. Anything else that you'd-
No, I think that was good.
Then how's Alliance doing organically? I mean, I know there's been a lot of FX fluctuations which are out of your control, but how are you seeing the performance of the business? It's been a few years on since you acquired it. What have been some of the results of global sourcing other efficiency capabilities that you've brought to Alliance.
Sure. Alliance's, of course, our international distribution business and it's in several countries throughout Europe and a developing country also. Probably the area of strength has been in kind of 3PL and growth in specialty markets through 3PL distribution. We also have a leading share in the U.K., where we're the distributor for Boots in the U.K., like we're a distributor for Walgreens here in the U.S. We did have a down quarter, the most recent quarter in international, and really the driver there was in a developing market economy there.
In the prior year, there'd been a meaningful price increase in October. We got the benefit for a full quarter in the first fiscal quarter last year. Then this year that price increase was at the very end of December, so we just got a week or two of benefit there.
Comps.
Yeah.
Because you mentioned Walgreens, like, we don't get into economics on contracts. That's not where I'm going here. Obviously they're no longer public. We do our best to track what they've been doing. As a newly owned entity within Sycamore, like, has anything changed about your relationship? You have a really long-standing contract that we just don't hear about as much from them anymore. Anything change in terms of the way that you're working with them, given that they seem to have stopped their store closure pathway for one?
Yeah. What I'll say is, Walgreens is a very important partner. We have a contract through 2031, and we want Walgreens, of course, to do what's best for the success of their business. For instance, on the store closure point, you know, they've announced that they're closing stores, and we want them to do what is best for their business, and I'm sure when they do close stores, it'll be under-performing stores.
Yeah.
We're just highly supportive of what actions they're gonna take that's best for their business.
Got it. Anything to call out of note on the contract renewal side? I mean, Walgreens goes for a while, a couple of your other ones go for a while. Anything notable that you've seen, and especially as you've thought about adjusting contracts or long-term renewals, anything about the IRA discussions you're having on the pharma side that's been translated into the ability to work more closely with your customers on the distribution side?
No, I think what we're always looking for ways to do more with our existing customers. That's a really strong return there. I think as we have talked about for, you know, going on 10 years now, the rebalance of customer contracts is something that we started about 10 years ago and worked across that to make sure that we're getting the fit, the right level of profitability across the classes of drugs, so that we can, you know, grow as our customers grow. Certainly, that's something that we would continue to ensure as the mix evolves and as our customers continue to grow.
Along those lines, I think there's been at least three or 4 cycles in my time covering distributors calling for the death of independent pharmacies. Last time I checked, the independent pharmacy market is not dead. What are you seeing in terms of behavior activities from your independent pharmacy customers? I know you're a strong provider partner with them. Are there any changes in terms of what they're asking you to do, given some of the market machinations? I'm thinking, you know, anything regarding GLP-1s and their financial impact from GLP-1s, where you're able to further help them with additional services.
No, I think honestly, it's an underappreciated part of our industry is that we have contributed to the stabil-
Yeah.
The sustainability of independent pharmacies across the United States. I think we've been, you know, that you know, there's been other industries where you haven't seen that type of dynamic. I think we've continued to evolve and bring services and bring purchasing scale to allow them to continue to benefit as they grow. You know, the biggest things that have changed on that market over the last five to 10 years is, you know, it's not one for one in terms of, you know, generally. It's not always, you know, one pharmacy, one owner.
In some cases, it's one owner with several pharmacies because they're leveraging the different services and solutions that their distributor provides them, and it helps them to serve the local community, but have the right level of profitability by having a multiple store footprint by leveraging some of those services and solutions. I think it's something that is an underappreciated social benefit of the distributors and retail pharmacy across the U.S.
Last question from me here. I know we never talk about unit economics on a specific drug class, but tying back to GLP-1s, given the massive growth of the market, you've been very transparent in both, A, giving us revenue from GLP-1s, and B, noting that it's a immaterial profit contributor. Is there anything about the market development that could make this a more profitable industry before we get to potential generics?
It is. We've been consistent in our commentary that while it's a big growth business for us and it is profitable for us, it's minimally profitable. We don't expect any change certainly in fiscal year 2026. There might be some point, you know, down the road where there's more competition in the market and it's more competitive and it's more profitable then, but we're certainly not calling that for any time soon.
Consistency works for me.
Okay. Thank you.
Jim, Bennett, thank you so much for being here. Appreciate it.
Thank you.